Since the revision of the Provisional Regulations on Consumption Tax in 2008, the scope of consumption tax levy and exemption for chemical products produced with crude oil and coal as raw materials has been controversial.After the online launch of the refined oil invoice module in 2018, the state has continued to strengthen the collection and management of consumption tax on the whole chain of the petrochemical industry. In particular, since August last year, the issue of levying consumption tax on chemical products such as crude oil products and coal-based oils as naphtha has been more prominent in Shaanxi, Shanxi, Inner Mongolia and Xinjiang, which has had a huge impact on the chemical industry in these places.

I. Multiple top-down demands for chemical product manufacturers to pay back consumption tax

(I) Types of chemical products with high incidence of consumption tax adjustments since last August

1. Stabilized light hydrocarbons

Stabilized light hydrocarbons refer to alkane mixtures with pentane and heavier straight-chain saturated alkanes as the main components, and the main application areas include: processing and production of solvent oils, processing and production of chemical raw materials such as benzene, and blending of automobile gasoline with additives such as methanol or ethanol. There are two common production processes for stabilized light hydrocarbons, one is to collect mixed light hydrocarbons associated with oil and gas fields during the crude oil extraction process, and separate and prepare them through high temperature, high pressure, fractional distillation and other physical processes, and the other is to use coal as a raw material, and prepare them through the process of direct liquefaction or hydro-liquefaction (Fischer-Tropsch synthesis). At present, there is only one national standard for stabilized light hydrocarbons, i.e. oil and gas field stabilized light hydrocarbons.

Both oil and gas field stabilized light hydrocarbons and coal-based stabilized light hydrocarbons are at risk of being adjusted to pay consumption tax. Among them, the tax adjustment of oil and gas field stabilized light hydrocarbons is controversial due to the differences between state-owned and private enterprises, while coal-based stabilized light hydrocarbons are adjusted due to the absence of national standards for a larger number of production enterprises.

2. Isooctane

Isooctane is a pure substance and compound with the molecular formula of C8H18, which is currently included in item 40828 of the List of Existing Chemical Substances in China. Isooctane can be directly applied to test gasoline anti-detonation performance, but also can continue to deep processing, including the production of solvent oil and gas chromatography comparison products, as a gasoline additive used to increase the octane number of gasoline (to improve the resistance to vibration). There are two common production processes for isooctane, one is the catalytic preparation of isobutane and butene, and the other is the hydrogenation of isobutene dimerization, both of which involve chemical reactions. There is no corresponding national or industry standard for isooctane. At present, some places have begun to adjust iso-octane to the caliber of "non-standard gasoline", and iso-octane is treated as naphtha to collect consumption tax.

3. Naphthenic hydrocarbons

Cycloalkanes are pure substances and compounds with the molecular formula of CnH2n, and most of them are included in the List of Existing Chemical Substances in China. For example, cyclopentane is included in item 14790 and cyclooctane is included in item 14803. Cycloalkanes can be used for further processing to produce lubricating oils, solvent oils, alcohols and ketones as chemical raw materials, or as additives for gasoline, diesel fuel and aviation kerosene. According to the type of feedstock, the production process of naphthenic hydrocarbons is divided into two types: catalytic cracking of crude oil and direct liquefaction of coal. There is no corresponding national or industrial standard for naphthenic hydrocarbons. At present, some places have begun to treat coal-based naphthenic hydrocarbons as naphtha to collect consumption tax.

4. Summary

In addition to the above chemical products, there is news that the production of oil-modified components such as xylene and MTBE will also be gradually included in the scope of consumption tax adjustment in the second half of this year.

(II) Main Reasons for Recovery of Chemical Products Consumption Tax

At present, the caliber of chemical products consumption tax is divided into two types, one is "forward retrospective + backward adjustment", i.e., the relevant products produced from August 2022 to the present are required to pay the consumption tax, and the future production of the same products will also be required to pay the consumption tax in accordance with the provisions of the law; and the other is to adjust the consumption tax backward only, not forward retrospective. The main bases and reasons for retroactive consumption tax can be categorized into three types:

1. Failure to obtain qualified inspection certificates

According to the provisions of the Announcement of the State Administration of Taxation on Relevant Policy Issues on Consumption Tax (Announcement of the State Administration of Taxation No. 47 of 2012) and the Announcement of the State Administration of Taxation on Supplementary Provisions on Relevant Policy Issues on Consumption Tax (Announcement of the State Administration of Taxation No. 50 of 2013), the appearance and form of the taxpayer's liquid chemical products produced and processed from raw materials, such as crude oil or coal, are the same or If a taxpayer produces and processes liquid chemical products from raw materials such as crude oil or coal with the same or similar appearance and form as taxable finished oil and can be used for the production and processing of taxable finished oil, the taxpayer shall levy consumption tax according to naphtha if it fails to obtain a qualified inspection certificate. According to this regulation, some chemical enterprises and coal chemical enterprises will be required to pay consumption tax when producing liquid chemical products if the following problems exist:

(1) Never obtained the product inspection certificate.

(2) Although the product inspection certificate has been obtained, the main body issuing the inspection certificate is not a national or provincial inspection organization for the record, or the inspection qualification of the inspection organization does not include the relevant products.

(3) Although the product inspection certificate, but before obtaining the certificate of inspection occurred before the production behavior, the competent tax authorities can still get the certificate of inspection of the enterprise before the production of chemical products levied consumption tax.

2. Related products do not have national standards and industry standards

According to the aforementioned provisions, obtaining inspection certificate is a necessary condition for the relevant chemical products not to be taxed as naphtha, but subject to the background of the preparation of national standards, some products with immature production process in the past have not yet formulated corresponding national standards and industry standards. With the innovation of production technology, although the relevant products have been widely used in the market, taxpayers are objectively faced with the situation of not being able to obtain inspection certificates, and are exposed to the risk of levying consumption tax on chemical products that are in a state of blankness at the national standard level. For example, the Stabilized Light Hydrocarbons (GB9503-2013) limits the scope of application of the national standard to "Stabilized Light Hydrocarbons from Oil and Gas Fields", which leads to the situation that even if some coal chemical enterprises produce stabilized light hydrocarbons compliant with the standard and have obtained inspection certificates in compliance with the requirements, the products are still subject to naphtha levied by the tax authorities as naphtha. Consumption tax.

3. Taxation of naphtha on the grounds that the chemical product is "light oil".

According to the Notice of the Ministry of Finance and State Administration of Taxation on Increasing the Consumption Tax Rate of Refined Products (Cai Shui [2008] No. 167), naphtha, also known as chemical light oil, is a light oil used for chemical raw materials processed and produced from crude oil or other raw materials. The levy scope of naphtha includes all kinds of light oils except gasoline, diesel oil, aviation kerosene and solvent oil. Non-standard gasoline, reformed oil, pull-out oil, pentane raw material oil, light cracking material (decompression diesel VGO and atmospheric pressure diesel AGO), heavy cracking material, hydrocracking tail oil, aromatics residual oil are all light oils, which belong to the scope of naphtha levy.In practice, some places consider that some chemical products themselves belong to the category of light oil, so they do not need to consider whether the corresponding products have obtained inspection certificates, and directly equate to naphtha to levy consumption tax. In this case, due to the difference in understanding of the scope of naphtha between the tax authorities and enterprises, even if the enterprises have obtained inspection certificates, they are still subject to tax adjustments.

II. Impact of consumption tax adjustment on the chemical industry

As mentioned before, the production process of stabilized light hydrocarbons, iso-octane and naphthenic hydrocarbons can be mainly divided into two categories, one of which is to take crude oil and associated gas from oil fields as raw materials, and to separate and produce them through high temperature, high pressure and fractional distillation. It is understood that the raw materials of these chemical products belong to the by-products of large-scale oil and gas field enterprises, due to the production of chemical products with meager profits (gross profit of a few hundred dollars per ton), oil and gas field enterprises are reluctant to put into production, so they chose to sell them directly to the chemical enterprise, which further separates the production of chemical products. If consumption tax is levied on the production of chemical products, the cost of consumption tax will increase by more than one thousand yuan per ton of chemical products, and most chemical enterprises will face huge losses.

The other category is to use coal as the main raw material, through the direct liquefaction of coal or hydro-liquefaction (Fischer-Tropsch synthesis) and other ways to produce. Currently, some coal chemical companies are engaged in this type of business. Compared to petrochemicals, which is a simple separated production process, coal chemical industry involves chemical reactions, which are more complex and costly, and the profit is more limited. Many coal chemical companies have been required to pay back taxes that even exceed their entire profits since they started production.

Against the background of relatively stable market prices of chemical products, if consumption tax is levied on the production of stabilized light hydrocarbons, iso-octane and naphthenic hydrocarbons, it will significantly increase the production costs of the relevant enterprises. Moreover, this adjustment involves the recharacterization of the relevant products, i.e. the production of the same products in the future will still be subject to consumption tax. At present, a large number of chemical enterprises have already been forced to stop work due to the uncertainty of the consumption tax policy, and their back-end processing enterprises have also been forced to tighten purchasing, and the chemical product industry chain is facing a huge crisis.

In addition, although the current consumption tax is mainly levied in the production process, according to the "Consumption Tax Law (Draft)", which is currently under public consultation, the consumption tax is gradually postponed to the consumption end. Chemical products are only the intermediate products of petrochemical and coal chemical industry, and the production of chemical products is far from the consumption end, and the levy of consumption tax in the production of chemical products is also contrary to the trend of consumption tax legislation and the principle of consumption tax collection.

III. According to the current consumption tax policy, which chemical products are not subject to consumption tax?

(I) Chemical products meeting three conditions should not be subject to consumption tax

According to the State Administration of Taxation Announcement No. 47 of 2012 and Announcement No. 50 of 2013, chemical products that fulfill one of the following three conditions should not be taxed as naphtha:

1. Products with molecular formulae listed in the List of Existing Chemical Substances in China issued by the Ministry of Environmental Protection (MEP) and products listed in the Certificate of Registration for Environmental Management of New Chemical Substances issued by the MEP obtained by the taxpayer.

2. The taxpayer has obtained the National Industrial Products Production License issued by the quality and technology supervision department at or above the provincial level, except for the products with the name of "petroleum products".

3. in line with the product's national standards or the corresponding provisions of the petrochemical industry standards, and taxpayers to obtain in advance by the National Certification and Accreditation Administration or the provincial quality and technical supervision departments in accordance with the law granting the laboratory accreditation of testing organizations issued by the relevant products to meet the national or industry standards of the test certificate.

(II) Problems in the Legal Basis for Taxation of Chemical Products as Naphtha

For the viewpoint that chemical products belong to chemical light oil and should be directly taxed as naphtha as claimed by some tax authorities, it is suspected that it is against the principle of tax law. According to the provisions of the Legislation Law, the basic system of taxation can only be created and adjusted by laws and administrative regulations, and the tax items are part of the basic system of taxation, which must be stipulated by laws and administrative regulations. 2012 Announcement No. 47 and 2013 Announcement No. 50, as normative documents issued by the State Administration of Taxation, can only interpret the consumption tax items and other elements of taxation, and do not have the right to adjust or expand the consumption tax. However, the "deemed paraffin tax" is not a taxable element of consumption tax. However, the provision of "deemed naphtha" makes the naphtha tax item stipulated in the Provisional Regulations on Consumption Tax change, which is beyond the scope of administrative interpretation. In the absence of the Provisional Regulations on Consumption Tax clarifying the scope of naphtha, and not stipulating that the stabilized light hydrocarbons, iso-octane, and cycloalkanes belong to the naphtha, it lacks the supreme law for these chemical products to be regarded as naphtha. As naphtha lacks the basis of superior law.

According to the Provisional Regulations on Consumption Tax, the object of consumption tax is the production of taxable consumer goods. In other words, a taxpayer needs to produce taxable consumer goods from non-taxable consumer goods or produce taxable consumer goods from A taxable consumer goods to B taxable consumer goods in order to generate consumption tax obligations. Stabilized light hydrocarbons, iso-octane, naphthenic hydrocarbons and other chemical products do not belong to naphtha, and their raw materials are crude oil, coal or associated substances in the process of mining, so they belong to the "production of non-taxable consumer goods from non-taxable consumer goods", which is not a taxable act of excise duty, and it is suspected to violate the principle of tax law to levy tax on them.

IV. How to Deal with the Risk of Chemical Products Consumption Tax Levy and Exemption by Enterprises

(I) Enterprises included in the current round of consumption tax adjustment need to prudently deal with tax enterprise disputes

For chemical enterprises under investigation of consumption tax, they should actively cooperate with the investigation of tax authorities, provide relevant information and tax regulations in a timely manner, and provide professional consulting and argumentative opinions in tax-related and petrochemical fields to obtain the understanding of the investigation authorities and properly prevent tax-related disputes. If the enterprise accepts the investigation and the tax authority has already made the consumption tax adjustment, the enterprise can consider the following angles of entry to deal with the tax enterprise disputes in a prudent manner:

1. Claiming that the relevant products belong to the substances in the List of Existing Chemical Substances

For enterprises producing chemical products such as iso-octane and naphthenic hydrocarbons that are subject to retroactive consumption tax, they can claim that the relevant products they produce belong to the substances in the List of Existing Chemical Substances. According to the "Interpretation of the Announcement on Supplementary Provisions on Relevant Policy Issues Concerning Consumption Tax", the products of chemical substances that have been included in the List of Existing Chemical Substances are of high purity, and can be distinguished from mixtures by applying specific methods. On the other hand, dutiable refined oil products are mixtures of various compounds, in which each substance maintains its original properties and cannot be expressed by chemical molecular formula, and they are not new chemical substances. Therefore, substances included in the List of Existing Chemical Substances are significantly different from dutiable refined oils in terms of their chemical properties. According to Announcement No. 50 of 2013, the taxpayer claims that its products have been listed in the List of Existing Chemical Substances, which can support the non-taxable nature of its products.

2. Submission of proof of eligible inspection

According to Announcement No. 39 of 2015, taxpayers producing products in compliance with national or industry standards are not subject to consumption tax from the month in which they obtain the relevant product quality inspection certificates issued by the quality and technology supervision departments at or above the provincial level (inclusive). Therefore, taxpayers should obtain qualified inspection certificates before they proceed with the production of chemical products such as stabilized light hydrocarbons, so as to avoid increasing the risk of collection of consumption tax on previously produced chemical products due to the late obtaining of inspection certificates.

According to Announcement No. 50 of 2013, the testing organization entitled to make the "relevant product quality inspection certificate" shall be a testing organization that has been granted laboratory accreditation by the National Certification and Accreditation Administration or provincial quality and technology supervision departments in accordance with the law, and the testing capability of the testing organization for the relevant products is within the scope specified in the schedule of its accreditation certificate. within the scope of the provisions. For testing organizations that meet the statutory requirements have been issued by the test certificate, Notice No. 50 of 2013 does not give the tax authorities the right to object to the testing procedures, test methods, test results, etc., so the test certificate reflects that the products produced by the enterprise do not belong to refined oil products and do not belong to the scope of the excise tax levy, the tax authorities should respect the test conclusions.

3. Starting legal remedy procedures such as administrative reconsideration and administrative litigation.

For the taxpayers who have been caught in the risk of consumption tax collection, the relevant enterprises should actively seek for professionals to take legal remedy procedures in time, including but not limited to administrative reconsideration, administrative litigation and etc. During the period of reconsideration and litigation, the taxpayers are required to take legal action. During the period of reconsideration and litigation, taxpayers can also file applications for reviewing the legality of normative documents, so as to properly cope with and resolve the consumption tax risks and safeguard their legitimate rights and interests by reviewing the legality of the State Administration of Taxation's Announcement No. 47 of 2012 and Announcement No. 50 of 2013. In addition, during the period of reconsideration and litigation, enterprises can also entrust experts and scholars in tax law to carry out expert argumentation activities. Experts and scholars are important participants in tax legislation, and they know more about the legislative purpose of the tax law and lead the development direction of the tax legislation, and the viewpoints of the experts and scholars will be of great help in the trial of the case.

(II) Enterprises not included in the current round of consumption tax adjustment also need to seek support and help from external professional forces

China's consumption tax related normative documents are numerous and complex, and taxpayers have certain difficulties in understanding and applying various policies. For petrochemical and coal chemical enterprises not included in the scope of the current round of investigation and adjustment, it does not mean that they are completely detached from the risk of consumption tax, such as the production of similar products, and they should also use the support of tax professionals to manage the tax-related risks, to ensure that the enterprises' daily operation is in compliance with the tax regulations and to avoid disputes. Disputes. Enterprises can hire professional tax consultants to answer all kinds of professional questions in the specific regulations:

1. Analyze the raw material structure of chemical products

Analyze whether the raw materials of chemical products include crude oil, coal and other products to prove whether there is any consumption tax risk for the relevant products and take appropriate countermeasures in time.

2. Obtain relevant supporting documents in time

For products without national standards, the tax consultant can provide relevant advice and guide the enterprise to obtain relevant supporting documents in time to avoid being included in the scope of taxation.

3. Preserve the products for regular inspection and testing

At this stage, the inspection certificates of chemical products are still of great significance to the collection and management of consumption tax. The tax consultant can provide guidance on the preservation of product samples and inspection and testing to avoid the relevant products from being wrongly levied consumption tax.

4. Maintaining positive communication with tax authorities

Tax consultants can communicate with tax authorities on behalf of enterprises. Compared with the mode of direct communication between tax enterprises, tax consultants can express their opinions more objectively, clearly and accurately, which is conducive to the efficient resolution of tax-related risks.